G3 Group — Update 1 February 2017

G3 Group — Update 1 February 2017

G3 Group

Analyst avatar placeholder

Written by

G3 Group

Profitability ahead

Industrials

NXT Company Spotlight

1 February 2017

Price

NZ$0.62

Market cap

NZ$34m

Share price graph

Share details

Code

GGL

Listing

NXT

Shares in issue

54.5m

Business description

G3 Group operates three principal business divisions: document and data management in NZ and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ.

Bull

Experienced board and management with the broad-based skills necessary to drive the acquisition strategy.

The businesses are currently profitable and there has been a track record of profitability and growth.

G3 has successfully acquired and integrated a number of businesses, especially in the last two years. Expansion from business mail in NZ has begun with the Rocket Mail data management acquisition.

Bear

Dependent on access agreements in NZ & UK where conditions may change and have an adverse impact on the business.

Transformation to new digital media is underway but is still early stage.

The nature of the current business mix limits the EBITDA margin to c 10%, but the planned move into the digital arena and further expansion into document and data management should enable G3 to bolt on higher-margin businesses.

Analysts

Jamie Aitkenhead

+44(0)20 3077 5746

Roger Johnston

+44(0)20 3077 5722

G3 Group (GGL) operates three businesses: document and data management in New Zealand and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ. The performance for the three months to 31 December 2016 was strong, with both gross and operating margins reported ahead of target. The company attributes its outperformance to strong revenues in the higher-margin document management business versus the less profitable business mail unit. As expected, inventory days showed an increase due to the previously announced one-off buy up of business mail products during Q1. These will continue to reduce as the product is sold off. Management expects to achieve all key operating metrics (KOMs) in FY17e.

Document management strong, UK recovering

GGL management highlights the strong performance of the document management business in Australia and New Zealand as a driver of the company’s strong performance. This is attributed to organic and market share growth. Business mail in New Zealand is also mentioned as a strong performer and RocketMail, acquired in April 2016, is performing well. Tourism UK, which at H117 reported a sales decline of 18% due to a soft UK tourist season and forex headwinds, has started to recover. Both Q2 and Q3 were highlighted as stronger for this unit versus the very weak Q1. Overall, management sounds positive about the performance across all of its business units and is confident of meeting its targets for the year.

Acquisitions integrating well, others sought

Bolt-on acquisitions have proven to be an efficient way for G3 to expand its business and service offerings into adjacent markets and to diversify the business away from the declining market for traditional mail. Small World Scotland, RocketMail and Tidy Files are examples of this trend witnessed in FY17. While it is too early to judge Small World Scotland, RocketMail and Tidy Files are integrating well. The company continues to look for value enhancing bolt-on acquisitions across its key markets. GGL does not intend to pay a FY17 dividend in order to keep funds available for future opportunities.

Valuation: Trading at 11.0x trailing EBITDA

The current share price of NZ$0.62 implies a market capitalisation of NZ$33.8m and an EV of NZ$47.57m based on net debt of NZ$13.77m at 30 September 2016 (last date at which disclosed). This translates to a trailing (FY16) EV/EBITDA of 11.0x based on the company’s reported FY16 EBITDA of NZ$4.34m.

Historical financials

Year
end

Revenue
(NZ$m)

PBT
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

32.3

1.8

3.0

0.0

20.7

N/A

03/15

40.5

2.6

4.8

0.0

12.9

N/A

03/16

43.9

3.0

4.1

0.0

15.1

N/A

Source: G3 Group. Note: EPS refers to diluted earnings per share.

G3 Group coverage is provided through the NXT Research Scheme

Business update

GGL highlighted the following in its Q317 business update:

Its document management businesses in Australia and New Zealand have continued to perform well via a mixture of organic growth and market share.

The UK tourist collateral business witnessed an improvement in sales in Q3 after a note of caution from management at the H1 results in November. On 8 December, GGL acquired the tourist collateral business, Small World Scotland, further expanding the company’s offering in the UK market.

GGL’s Mail NZ businesses continued the strong performance in Q3.

RocketMail, acquired in April 2016, is performing well. It has been relocated to GGL’s main New Zealand site in Auckland which will reduce its lease costs and increase its integration into GGL.

Outlook

GGL management is pleased with the group’s operating and financial performance in Q3 and year-to-date. Management reaffirmed its intention to grow the core operations via the acquisition of complementary and digital-focused businesses.

Key operating milestones (KOMs) in H117

In the disclosure document, GGL defined its KOMs as:

gross margin: group revenue less cost of sales as percentage of revenue;

operating margin: revenue less gross margin less the direct variable costs of production as percentage of revenue;

days' sales of inventory: the number of days’ sales it will take to clear the inventory

Exhibit 1: G3 Group’s key operating metrics

2015

2016

Q317

Ytd 2017

2017

Actual

Actual

Actual

Actual

Target

Gross margin (%)

19.5%

22.9%

26.5%

24.2%

22.0%

Operating margin (%)

17.6%

20.8%

23.8%

22.0%

20.2%

Days' sales of inventory (no of days)

19.0

20.9

43.1

34.8

22.0

Source: G3 Group

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
This report has been commissioned by NZX Limited (“NZX”) and prepared and issued by Edison Investment Research (NZ) Limited (“Edison”). This report has been prepared independently of NZX and does not represent the opinions of NZX. NZX makes no representation in relation to acquiring, disposing of or otherwise dealing in the securities referred to in this report.

All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however neither NZX nor Edison guarantees the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in this report may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Australia and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. This research is distributed in the United States by Edison US to major US institutional investors only. Edison US is not registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison US does not offer or provide personalised advice. This research is distributed in New Zealand by Edison). Edison is the New Zealand subsidiary of Edison Investment Research Limited. Edison is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. The distribution of this document in New Zealand is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the New Zealand Financial Advisers Act 2008 (FAA) (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. Edison publishes information about companies in which we believe our readers may be interested, for informational purposes only, and this information reflects our sincere opinions. This report is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, this report should not be construed as a solicitation or inducement to buy, sell, subscribe, or underwrite any securities referred to in this report. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. Edison has a restrictive policy relating to personal dealing. Edison does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, estimates of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. To the maximum extent permitted by law, NZX, Edison, either of their affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

Essentra — Update 1 February 2017

Essentra

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free